Chinese stocks have crashed on the coronavirus outbreak. Is the crisis a potential opportunity for investors?
In case you forgot, the country’s technology sector rallied sharply before the disease emerged in Wuhan. There were broader reasons for the gains that may come back into play over the longer-term.
First was Beijing’s trade deal with President Trump. Most readers know all about this.
Next, and perhaps more important, were changes to global indexes in 2019 that increased weightings toward China. Those effectively make big institutions want to invest more in the country. Index operators expect to raise allocations further in coming years. The market, being forward looking, may anticipate the changes.
Finally, China is in the midst of a major tech and e-commerce boom. A generation of affluent young adults has come of age after the advent of the Internet. Unlike the U.S. or Europe, there are few legacy shopping centers or retail stores. It’s a completely new — and totally digital — consumer economy.
Guide to Chinese Tech Stocks
Several companies have emerged so far. Here’s a guide to the some of the biggest and most actively traded.
Alibaba (BABA) is the largest and most important, with about $550,000 of market capitalization. If it were a U.S. company in the S&P 500, it would rank No. 6 between Facebook (FB) and Berkshire Hathaway (BRK.B).
The “Amazon.com of China” broke out in November after selling shares on the Hong Stock Exchange. It then ran all the way to new record highs in mid-January before the coronavirus drove it back under the old peak around $210 from mid-2018.
It’s had a strong earnings track record, beating estimates on both the top and bottom lines each of the last four quarters. Like Amazon.com (AMZN), BABA is more than just an online retailer. The company also has a fast-growing cloud-computing business and Ant Financial, the world’s most valuable FinTech firm.
Put it all together and BABA is the go-to stock for investors seeking exposure to the future of China’s economy. Its next quarterly report is on February 13.
JD.com and Netease
JD.com (JD) is next major name by size. The e-commerce company fell on a scandal in 2018 after its founder was arrested, but proceeded to beat estimates the last several quarters by focusing on smaller cities. JD has also built a network of logistical centers and delivery services.
Search-engine Baidu (BIDU) and Netease (NTES), a provider of online content and games, are next on the list.
BIDU had a long period of weakness after Beijing tightened online advertising and search rules. It’s showed a turnaround in the last two quarters by focusing on videogames.
NTES has a stronger earnings history. It began the year by gapping higher on reports it might list shares in Hong Kong. After coronavirus hit, it’s now pulled back to retrace almost the entire rally.
Nio and Luckin Coffee
Electric-car maker Nio (NIO) and coffee chain Luckin Coffee (LK) are the other two big names on our list. Both have gone public more recently than the others mentioned above.
NIO had a huge selloff in 2019 after the Chinese government cut subsidies for electric cars. But then it roared back in December and January on strong orders. It also benefited from the rally in larger U.S. rival Tesla (TSLA).
LK went public last May for $17 a share. It drifted through mid-November, before exploding higher on the heels of a strong earnings report. That lifted it all the way to $50, before coronavirus dragged it back under $40.
LK is more than just a coffee shop. Its business model is completely digital, accepting orders only via app and analyzing each piece of data to develop new products. Investors are already viewing it as a hyper-growth alternative to Starbucks (SBUX).
In conclusion, the coronavirus made investors bail on China last week. But it also produced major pullbacks in some companies that only recently were flying. It may provide opportunities for investors looking for entries in a trending corner of the market.